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Tuesday, February 28, 2012

Markets vs. Democracy - Round 278

The Irish government has just announced that it will hold a referendum on the euro fiscal compact. The Irish Taoiseach Enda Kenny said he had taken advice from the country’s Attorney General, and made the decision to call a public vote. He also said he would sign the fiscal compact treaty at the meeting of EU leaders on Friday, and the details and arrangements for the referendum will be sorted and announced in the coming weeks, with a vote to be held before the summer.

The Irish government had previously said that the chances (or risks if you ask the markets and EU elite) of a referendum were always 50-50, so this was far from a foregone conclusion. And, as Zerohedge put it, markets have reacted badly to the news of democracy, with the euro weakening significantly. But what is the precise significance of this announcement?

• The vote will essentially determine whether Ireland has access to future bailout funds or not. For a country to access the ESM, the eurozone's permanent bailout fund, it must have ratified and fully adhered to the treaty, according to the terms attached to the deal. The Irish government has already given indications that it will tie its approach closely in with the prospect of further bailout funding, with Deputy PM Eamon Gilmore pointing out the link between emergency funds and the fiscal pact approval. These scare tactics are likely to grow throughout the referendum campaign, with the flip-side of rejecting the treaty being seen as tantamount to a vote for eurozone exit. In other words, the Irish will vote with a gun to their head.

• It provides yet another illustration of the clash between different parliamentary/constitutional democracies (in this case the German vs the Irish constitutions) that time and again have served as an ‘obstacle’ to perceived crisis solutions.

• Irrespective of the outcome, the vote will not derail the euro fiscal compact as it only requires 12 member state ratifications before entering into force, though it could well limit the impact of the pact.

• Those that thought that the complicated political situation in Europe could be reduced to a simple 26 vs 1 narrative, following Cameron’s ‘veto’ to an EU27 Treaty back in December, have received another reminder as to why that isn't the case.

In sum, it would have been difficult to avoid this referendum and we're glad the Irish government did not engage in the legal gymnastics that have been going on elsewhere in the eurozone (*cough* Frankfurt). If further fiscal integration is ever going to succeed (leaving aside whether it's desirable), it will have to happen with a clear and strong mandate from the people. This is also a practical point which market players should ponder. Changes built on a clear mandate from the people (particularly when wrapped in pretty heavy austerity) have a far greater chance of standing the test of time.

But the likely approach of tying a Yes vote to access to more bailout funds and greater security and a No vote to a eurozone exit is already worryingly over-simplistic. Finally injecting some democracy into the eurozone crisis should not be watered down by pigeonholing it into tightly defined categories.

That said, as we've noted, the fiscal pact has already been watered down itself and signing up to it would not be the end of the world for Ireland - but only if that's what the people decide after a full discussion of the issue.

6 comments:

Rik
said...

Fully agree the market is very difficult to follow on his issue.-If there is no platform for decisions with the population like further integration, it might end badly. A lot of countries are not too far from a majority against everything European, if there would be political parties jumping in that hole (and in some countries they do already (France, Holland, Austria, Finland to name a few). It could create a further integrated but much more unstable Europe with a lot of fall out if things go wrong.-with Greece. How can anybody think the population will accept a decade or likely more of severe austerity from a corrupt totally uncredible government? You simply need a platform for that.-same with Ireland and Portugal. These countries are more stable in this respect but have an election behind them.-wanting Greece to remain in the EZ. The country drags scarce resources from already hardly growing countries to a bottomless pit. Longer term Greece and co are exactly the countries that will create the next big problem.-ignore laws (like the no bail out clause) or try to evade them as cretively as possible and expect citizens to obey the laws.

I think the argument made on Zero Hedge that "the Irish will vote with a gun to their head" is naïve. Ireland also has a gun to the Eurozone's "head", and if they refuse the fiscal compact then contagion could again put the Eurozone at risk. Investors have had plenty of time to minimise exposure to Greece, but the threat of an Irish default is potentially another matter. A better analogy might be that the entire Eurozone is now wired with explosives, and all sides are bickering other the trigger.

I'm also glad that the Irish government has avoided "legal gymnastics". If they have a constitutional obligation to hold a referendum, then they must hold a referendum. However, you are also being naïve when you criticise the over-simplification of the issues... that's how referenda work! If you support plebiscites (and, in cases of constitutional amendments, I do) then you have to accept that incredibly complicated, multi-faceted issues will be boiled down into a simple binary "yes" or "no" choice. That has always been one of the principle criticisms of referenda.

Finally, does Open Europe have / will it have a position on how the Irish should actually vote?

Good analysis Open Europe. It is entirely true this is a matter for the Irish - some of them, of course, won't have a say because they live north of the border.75% of our people wanted a referendum and pressurised the GVt in this respect. There are 3 months to go to the actual date we will vote.....lots of water may flow under the bridge by then.

"The referendum may cause some negative sentiment for Irish sovereign risk, in terms of question marks over Ireland's long-term position within the Euro area and how the government hopes to return to the bond markets later this year.

We believe the impact of an Irish 'no' vote for the wider euro area and thus for general market sentiment would be much smaller than at previous Irish referendums.

We expect Ireland to vote 'yes' eventually - possibly in a second vote à la Lisbon II."

So, they're downplaying the economic. But their idea of a second vote sounds like a sick joke. I'm getting a horrible sense of déjà vu...